Why is this so important? First its important to know what a conviction buy is.

A conviction buy is rare to say the least. It occurs when analysts and fund managers are convinced their analysis of a stock projection is correct and believe they will earn an outstanding return on holding the company's stock. Although the term is not used often on Wall Street, large firms like Goldman Sachs and many boutique investment firms have conviction buy lists. Goldman Sachs doesn’t update this list quarterly or yearly but adds and drops companies as it sees fit. Disney's addition to this list is significant.

Goldman Sachs set Disney’s stock price target at $138 per share in the next 12 months. That’s a 22% increase from its $113 stock price when the announcement was made. Here are some reasons why the stock is projected to do well.

Box Office Success

Goldman Sachs thinks Disney is a top stock because the film division should drive record studio earnings in fiscal 2017 and 2018. The next two years are expected to be Disney’s best lineup of films ever. Here are a few of the big releases set to come out:

Guardians of the Galaxy Vol. 2- April 2017

Cars 3- July 2017

Pirates of the Caribbean: Dead Men Tell No Tales- May 2017

Thor: Ragnarok- November 2017

Star Wars: The Last Jedi- December 2017

Black Panther- February 2018

Avengers Infinity war- April 2018

Toy Story 4- July 2018

Mulan (Live Action Remake)- November 2018

These big-name blockbusters are sure to rack up significant box office revenue.

In addition, Disney’s recent box office performance - the live-action remake of “Beauty and the Beast” - has had tremendous success by recording the 6th highest opening weekend box office ever. After just a month, it earned 500 million in the US and 1 billion dollars worldwide. To put this into comparison, Disney films surpassed just over $3 billion in U.S. box office sales in 2016, which was an industry record.

Subsidiary Growth

It’s not just box office sales that makes Disney look so good. There are growth catalysts across most of Disney’s assets. Upcoming movie series like Star Wars, Cars, and Avengers have large consumer product and licensing opportunities so revenue will continue long after the movies have left the big screen. On top of that, Disney’s sports entertainment subsidiary ESPN is growing fast from its contract with the NBA. Disney Theme Parks are expecting record profits in the next two years as well.

In case you didn’t know, here are just some of the companies owned by Walt Disney Co:

Walt Disney Pictures

Pixar Animation Studios

Lucasfilm Ltd.

Marvel Studios

Touchstone Pictures

Walt Disney Records

Hollywood Records

Disney Theatrical Productions

Disney Store Worldwide Inc.

Disney Publishing Worldwide

Walt Disney Parks and Resorts

Disney Cruise Line

ABC Television Group

Disney Channels Worldwide

ESPN Inc.

By owning so many subsidiaries that complement each other and compete in different product markets, Disney minimizes company risk and diversifies its revenue streams. There is, high growth expected amongst most of Disney’s subsidiaries in the next two years. This is especially true if there box office hits continue to do well. Successful movies will get people buying merchandise, visiting theme parks and looking for the next big hit. This all means high expected top line revenue growth.

ROE Growth

Walt Disney Co. has been steadily improving its return on equity. Over the last 5 years, Disney has grown its ROE by a whopping 52%. Investors love companies with increasing returns on equity because it shows how well a company is reinvesting the capital shareholders have invested. It is a sign that manager's can effectively find opportunitie and then capitalize on them.

Net Income Growth

Disney’s bottom line has also increased steadily over time as it has become better at controlling operating costs. In the last 5 years, Disney has pocketed $14 of every $100 in revenue and net income grew by 65% while revenue grew by 32%. We can only expect net profit to increase as Disney brings in more box office revenue over the next two years. While these movies are expensive to create, each additionnal movie ticket that is sold beyond the break even point if pure profit. That's why box office hits, such as Beauty and the Beast, are so profitable for the company.

Conclusion

Goldman Sachs' team of expert analysts predicts Disney stock to perform very well in the future. The trend in ROE and net profit margins certainly tells a similar story. With revenues increasing across the board for Disney’s subsidiaries and a blockbuster lineup of upcoming flicks, it’s easy to see why Goldman Sachs loves Disney so much. The house of mouse is not looking to slow down anytime soon and will continue to assert its dominance on the big screen and the stock charts.

]]>http://blog.vuru.co/whats-in-store-for-the-house-of-mouse/92f32cc0-25cf-4d68-b1ff-6b310adb5b27Tue, 18 Apr 2017 20:13:59 GMTAnyone who has taken a business course in their life knows the first rule about strategy: the company that tries to be everything to everyone will end up being nothing to no one. The idea is that no one company has the ability to dominate every market in which they compete in. Simply speaking, each one of these industries is incredibly complex and the scale needed to become a market leader is just too much for anyone company to hope to succeed.

The problem is that someone forgot to tell Jeff Bezos.

Amazon has evolved into much more than the online retailer that acts as your one stop shop for all of your purchases. It seems the company’s goal is to get a slice of all of the action in every purchasing point of your life. Amazon is breaking all of the rules of business strategy, and might actually be succeeding.

Here is a quick run down of the major segments Amazon operates in:

Online purchasing hub (Amazon.com)

On Demand Cloud Computing (Amazon Web Services)

Digital Content Streaming (Amazon Prime)

Brick and Mortar Retail

It’s no surprise that the company’s total revenue just keeps going up - even doubling since 2010.

The company started as an online bookstore that later expanded into everyday electronics (CDs, DVDs, MP3s) in hopes of cutting out the need for retail locations. They figured that people didn’t need to see the product in person to be willing to purchase it. For a lot of these products they were right - leading to explosive growth.

If the company was founded to be an online retailer that would become your go to online market place, how does brick and mortar retail fit in? Is the company straying from its core mission?

But that’s not the point in the mind of CEO Jeff Bezos. Amazon has grown so large by fighting back against the entrenched ideals of business. Their growth was accelerated by the willingness to take risks on the insights of their management team. Amazon wisely knew that they money they would make if successful greatly outweighed the money they would lose if they failed. Take enough risks at something is point to stick - just like Amazon Prime and Amazone Web Services.

Nothing illustrates this point better than the Amazon Fire Phone. The company invested heavily in creating a smart phone that could compete with Apple and Samsung, but was unable to get a product to market that users wanted. So, the company scarpped it and moved on. The management team knew the return of dominating the smart phone market would greatly outweigh the up front cost if it failed.

Maybe the more accurate mission for the company would be one in which they push the norms for business by taking wise and caculated risks in new markets.

This brings us back to the company today. With significant investments in Amazon Prime, brick and mortar retailers, and the NFL, Jeff Bezos is not resting on his laurels. If he wants the company to continue to grow at the pace it is now, the company will have to continue to take smart risks. Amazon is fortunate to have an incredible management team, a strong balance sheet and the culture to make this happen.

If we think once again about the first rule of strategy it becomes clear that Amazon isn’t breaking it. They’re trying out new markets, seeing what works and what doesn’t. Successes are folded into the company’s operations and become the focus. Since they’re willing to cut their losses when things don’t work, they are not trying to be everything to everyone - they’re just listening to what customers want.

]]>http://blog.vuru.co/is-amazon-breaking-the-first-rule-of-strategy/3e55f2d6-7f30-4529-b5cc-296f4bc31c85Tue, 11 Apr 2017 19:29:00 GMTThe Oracle of Omaha is the investing legend whose battle-tested strategies many people try and copy in their own personal portfolios. Some of his most-famous investments, over the course of the past few decades, have been widely successful. This has made him one of the world’s richest men.

I am sure most of us would have been excited to buy into Coca-Cola, Wells Fargo and Geico at the beginning stages of their success. The time has unfortunately passed for investors to get in on the ground floor in these companies. Take a read here for why we see trouble ahead for Coca-Cola.

The next best option is to find the next great company Warren Buffet would be interested in.

Easier said than done right?

Most people would die for the stock picking skills of this world famous investor. With the power of Vuru’s stock screeners it becomes much easier than one might think. First of all, let’s look at what Warren searches for in a company.

Return on Equity: For every dollar invested in the company, Warren looks for the company to generate at least $1.15 in profits. These company’s have a management team that can find and invest in profitable opportunities. These companies also have the profits available to continue to be able to grow.

Pricing Power: The more your company can charge for a product, the more money they will make. Look at the gross margins of the company, are they more than 40%? This is what Warren looks for in his investments. Companies with gross margins larger than this have better products than their competitors and are realizing more profits for item sold.

Competitive Advantage: Warren looks to invest in companies with net profit margins of at least 20%. After the gross margin, how much does it cost the company to operate all of the behind the scenes functions? HR, finance, accounting… the less the company spends on these roles, the more money leftover for investors

Capex/CFO: The key to this metric is the thinking about how much capital is required to fund the company’s operations. The more capital intensive the company is, the more this will drain on the cashflow of the company. Warren looks for companies that require less than 50% of their cash flow to spent on capital expenditures.

Based on this analysis, what sort of companies would Warren be looking at now? Looking at Vuru’s screening technology - with the power of the Buffet Calculator - we can see 10 such companies. All of these companies meet the previously mentioned criteria.

Each of these companies are leaders in their industry and many have been providing sold returns to their shareholders in recent years. Some of them may be considered in the same league as Coca-Cola and Wells Fargo, in the sense that the company has reached maturity, but each company is also generating more than enough income to fund future growth. This is something that KO and WFC cannot say for themselves.

The calculator serves as a way to determine prospective investments. The next step is to think of the valuation these companies currently trade at. Apple is trading at 17x its earnings while Visa is trading at 42x. Despite being good companies, it can be argued that either of these companies are still overvalued. Once you’ve found a good company that meets your criteria, it’s equally important to consider if it is also reasonably priced. The screener is a powerful tool, but it’s only half the battle.

To use the Buffet Calculator, or make a screener of your own, head here to use the Vuru screening technology

Disclaimer: I am not a financial advisor, please contact one before making any trading decisions of your own. This piece serves as my personal opinion and should not be taken on the basis of a recommendation of trading strategy.

]]>http://blog.vuru.co/what-companies-might-warren-buffet-be-looking-at/7db72fa2-7ce2-4763-8daf-e8108631d0ddSat, 01 Apr 2017 20:36:16 GMTWhen you need to send a package, you often choose between FedEx and United Parcel Services. These two companies compete very hard to be the carrier of choice for their customers and this can be accurately reflected in the stock price performance of their shares.

Many critics have regarded the 2 giants of the shipping and logistics sector as relatively safe investments. FedEx and UPS make it their business to ship whatever you want, wherever you want, and they continue to make strides toward getting it there whenever you want as well. With a combined US domestic market share falling just under 80%, there’s a huge barrier to entry in the shipping industry.

Amazon: A Real Threat?

In recent years, Amazon has become another key player in the market after announcing they will take over some of their own logistics operations. With the rise of internet shopping and growth in Amazon, it is likely they will continue to expand to the shipping and logistics industry. However, Amazon currently makes up 7% of UPS's North American business and 3% of FedEx's so it does not pose a risk in stealing significant market share.
The US delivery sector is a comfortable duopoly between UPS and FedEx.

So, who is crowned the king of the couriers? FedEx or UPS? Let’s compare and see.

Growth:

UPS, is almost two times the size of FedEx in terms of market cap but FedEx stock has appreciated at a much larger rate than the UPS ticker since 2000. FedEx is perceived as having higher growth opportunity – a perception that is proven yearly by its astounding compound annual growth rate of 9.6%. FedEx takes take the cake in terms of historic growth. But with the companies ties to the performance of a cyclical American economy, the question for many investors is whether UPS and FedEx have what it takes to continue benefitting shareholders, and beating the market going forward.

Dividends:

UPS and FedEx have different dividend philosophies. UPS pays out slightly more than half of its earnings every quarter as dividends. It also has a better track record of dividend growth, increasing its quarterly payouts by 5% to 10% per year since the end of the 2008 financial crisis. FedEx on the other hand, has paid out 12.07% of earnings as dividend over the past 5 years, choosing to reinvest the remaining capital. Also, it's only recently that FedEx took dividend growth particularly seriously, making penny-per-share increases in its quarterly dividend until 2014.
UPS has paid 2.75% of the stock price back to investors annually as dividends over the past 5 years. In comparison, FedEx has only paid 0.51% of the stock price.

Overall, United Parcel Service takes the edge over FedEx on the dividend front.

Who has the competitive advantage?

Both UPS and FedEx have excellent gross profit margins. Their ability to create profit from sales reflects their competitive advantage in the shipping and logistics industry. UPS and FedEx have excellent pricing power and can raise their service prices to increase their profitability.
However, UPS once again edges out FedEx in the competitive atmosphere with a gross profit margin of 75% in the last 5 years as opposed to FedEx’s 63%.

Return on Equity:

The return on equity (ROE) is an extremely useful metric that measures how well the management at UPS and FedEx is investing shareholders' money and the extent to which it is creating or destroying value.
Over the past 5 years, UPS has generated excellent profit with the money shareholders have invested with a 95% ROE. Although this seems unstable, UPS has stood the test of time in providing a solid return on equity. Since the 2008 financial crisis, ROE has been 85%. In comparison FedEx had a ROE of 11% in the last 5 years.
UPS management does a much better job than FedEx to create value and increase net profit.

The Winner?

Overall, both FedEx and UPS have many opportunities and risks that lie ahead, and it's hard to pick an obvious favorite. For dividend investors looking to make income now, UPS is the clear choice. However, for those with time and patience who are looking to hold for retirement, the continued future growth of FedEx looks very promising.

Disclaimer: *I am not a financial advisor, please contact one before making any trading decisions of your own. This piece serves as my personal opinion and should not be taken on the basis of a recommendation of trading strategy. *

]]>http://blog.vuru.co/battle-of-the-carriers/ba6daf87-5758-43dc-865c-9a353ed2b602Sat, 25 Mar 2017 21:11:51 GMTTwo weeks ago, we put out a piece suggesting that we thought Snapchat (NYSE: SNAP) was likely to follow the path of Fitbit and not the path of Facebook. You can read that piece here if you’re interested. Its certainly been a rollercoaster ride for the early shareholders of Snapchat. After an absolutely electric first two days for the company, the shares have been slowly declining over the past two weeks. As of Friday's close the shares are now down below their IPO price, and are currently at $19.54.

So how does this happen? Surely the company cannot have changed all that much in two weeks to make investors suddenly want to stay away from the company. The investment banks responsible for the IPO may lead to an answer to this question

Just ask Goldman Sachs and Morgan Stanley

It’s important to take a refreshing look at how IPOs actually work, to show that the company’s eye-popping gains on the first two days since going public didn't have anything to do with the fundamentals of the company. The two-week decline in the shares of the company are much more revealing.

Just as a quick lesson, IPOs for the most part work something like this; when a company wants to go public they talk to a bunch of investment banks. These banks help the company determine what they are worth, how much they should price their shares for, do the legal work and help find investors to buy the initial shares.

For the less finance savvy among us, it is important to remember that all parties involved are trying their best to make the IPO successful. This success, in most people’s minds is ensuring that on the first day of listing the stock price goes up for the company and hopefully in the future. Snapchat wants this to ensure they are making as much money as they expected. The bankers want this to make sure they can legitimize all of the fees they charge. And the original shareholders want to make sure they aren’t buying into a losing company.

Goldman Sachs and Morgan Stanley were the leading banks picked to take the company public. These companies are the biggest players in the industry and have plenty of experience with these sorts of deals - including the IPOs of Twitter and Facebook. Part of the work that these bankers do is to canvas the big players (hedge funds, pensions, etc.) to see what the interest is in the shares of Snapchat. They can weigh this against the amount of capital that the company wants to raise to determine the appropriate price. The sweet spot is where they can expect to sell all of the shares, find the right price, and minimize their own risk.

So what does this mean for Snapchat? It means that there was no way Goldman and MS were going to botch the initital offering. The shares had nowhere to go but up on the first day of the IPO. These banks ensure that there were enough demand from the "big boys" to increase the share price. The last thing they wanted was to be stuck with Snapchat shares that were worth less than what they thought.

The fundamental questions that we posed in the last article haven’t changed. Are they going to be able to profitably operate their app? Will they be able to profitably enter the wearable technology market when so many other companies have had difficulty? How does their core product compare to fully integrated social platforms like Facebook? Will the blatant copying of core feature by Instagram stall company growth?

Two plus weeks of market results seem to validate our concerns. Clearly other investors are equally concerned about the stiff competition the company faces. No new information has been released by the company and thus investors will have to wait for the next quarterly financial release to move past the speculation in the company.

Disclaimer: *I am not a financial advisor, please contact one before making any trading decisions of your own. This piece serves as my personal opinion and should not be taken on the basis of a recommendation of trading strategy.
*

]]>http://blog.vuru.co/snapchats-quick-start-doesnt-mean-anything/d34be63f-a233-4ff7-b538-356d653a7127Mon, 20 Mar 2017 20:06:33 GMTIn our newsletter two weeks ago we highlighted the comments of Coke’s new CEO James Quincey at a recent analysts conference. For those not yet aware he established a new strategic vision for the company - a shift in focus from the core soda brand and a stronger focus on becoming what he referred to as a “total beverage” company. Former CEO Muhtar Kent was famous for always stating the Coca-Cola was all about its main soda product. Its evident that the company has realized that times are changing.

Forefront in the mind of the company, and their main competitor Pepsi, is the effect of a soda tax in Philadelphia. The city implemented a 1.5 cent tax for every ounce of soda sold in each product. For the average 591mL drink this amounts to only an additional 20 cents in additional cost to the consumer. The remarkable part of this tax has been the effect on the sales of soda in the city. Coca-Cola has reported that sales volumes in the city have dropped 30 to 50% and Pepsi is saying their sales have declined 40%.

It no secret that sugary drinks are bad for us. People have known for a long time. However, it took just a small tax for people to change their habits. Many cities around the US have seen the success of this plan in Philadelphia and are discussing implementing similar taxes in their jurisdictions.

People are finally changing their attitudes and their habits surrounding sugary drinks. In fact, according to the New York Times (link), soda sales have declined 25% in the US in the past 20 years and it is expected that bottled water will overtake soda as the largest beverage category. This stagnation can be seen in the total revenues of both companies below.

The soda makers have noticed this shift, as evidenced by the comments of James Quincey. That same New York Times articles suggests that children are consuming 79 fewer calories from sugary drinks from 2004 to 2012. This was before the tax began changing consumption people's minds. When the next generation of potential soda drinkers are changing their habits, it is important for the companies to change along with them.

What is in the realm of possibility for these companies? The problem is staggering, for Coke in particular, which has 73% of its sales volume from carbonated beverages according to Forbes. Pepsi, although has stronger sales diversification, is in the same boat. In hopes of answering these problems, both of these companies have been trying to diversify their sales. Pepsi owns brands like Gatorade and Tropicana; Coca-Cola owns Powerade and Minute-Maid. This is where the future is.

But theses investments come at a cost. New brands don’t possess the same economies of scale as traditional soda brands. They also required a larger per unit marketing budget. Both of these things are weighing on the operating margins of both companies - as shown below.

So what does this mean for investors?

No it is not the end of the world for investors. Coke and Pepsi are still going to be around for years to come. What it should be is a wake up call. The status-quo will not cut it anymore. The former fortress of profits that was the soda industry is slowly being destroyed by changing consumer tastes. Taxes on sugary drinks are unlikely to become widespread in the near future. Some places may add taxes in the near future, but the real worrying part is changing consumer perception.

Investors in these companies should expect suppressed profits in the coming years. Switching the focus from soda to other new beverages is expensive and these markets are competitive. For the most part Coke and Pepsi cannot enter the market and have the same success as soda. It takes time to establish a market leading possession.

In all likelihood profits are going to continue to on the downward trend. But these expenditures are likely to be successful. The marketing power of both of these companies allow them to assert their brands on the masses. In the long-run things are likely to on the upward trend for shareholders, but some near-term uncertainty should be expected.

]]>http://blog.vuru.co/trouble-for-big-soda/f3a91358-ec45-4c10-ad5d-362d322baf2dMon, 13 Mar 2017 20:47:27 GMTBig box retailers have been making headlines as of late. Some of the formerly largest companies - Sears and JCPenney - have been struggling for years to make a profit. On the other hand, similar big box chains like Walmart and Best Buy, are soaring to new highs. Why the difference? The reason why some companies are struggling, and others succeeding, it not as obvious as it seems. Amazon changed the game, but not everyone was paying attention.

The real driving force was the changing demands of the consumer. Millennials have come out in full force demanding changes to the traditional brick and mortar retail offering. Speaking from my own anecdotal evidence, I have not purchased an item from a traditional big box store in the last year. However, I have spent time on the Walmart and Best Buy websites looking to buy items from their online stores. These companies have listened to what new-age consumers have asked for and responded accordingly. The importance of this should be considered even further with new entrants to the market, like Amazon, tailored directly to the next generation.

These four companies together provide a wonderful glimpse into what to do and what not do when it comes to responding to competition. Amazon changed the game, but not every company listened.

Amazon sells many of the same products as all four of these companies. But neither WMT or BBY have struggled to deal with emergence of online shopping in quite the same ways that Sears and JCPenney have. Shown below is the relative performance of all four of these companies, and the market over the past five years. What did WMT and BBY do differently than SHLD and JCP?

(Google Finance)

The divergence of these companies begins 10 years ago.

At this time Sears and JCP’s revenues were at all time highs and these revenues were trickling down to the bottom line with healthy margins. These companies were market leaders. In the highly contested retail market, companies need to consistently reinvest these profits to meet the ever-changing demands of consumers. It was at this time that Sears and JCPenney began to use their profits to buyback their own shares. In the opposite fashion Walmart and Best Buy invested their money back into their own stores and online platforms.

JCP and Sears spent billions of dollars after 2006 in their own shares. The logic given by management was that their shares were undervalued and they were doing a service to their shareholders by buying them back. However, share buybacks do nothing to enhance the value of stores. These company’s retail stores failed to change up their product line, offer brands demanded by consumers, or consider that consumers may be shopping in new ways. In 2007, Sears was buying back their shares at a price above $150 and JCP at prices above $30. Both of these companies shares now trade at prices below $10. Good use of company capital? Probably not.

All four of these companies tell their shareholders that they only have their best interest in mind - but only two of these companies really understood what that meant in this industry. Companies needed to consistently invest in service enhancing initiatives, particularly in a time with emerging competition, to make sure their investors could expect returns in the future. With the emergence of Amazon, retailers needed to go the extra mile to make customers willing to get in their car and go to the store. Share buybacks make earnings look better in the short-term, but when revenues go down they can’t hide the company’s inability to bring in consumers. Now, as Sears and JCP struggle to make ends meet; they are closing thousnds of stores and firing even more employees.

All in all, the stories of Sears, JCPenney, Walmart and Best Buy show that we’re not coming to the end of the Big Box Store. What’s happening is the emergence of players like Amazon is that the consumer can now demand a better experience from these large companies. Walmart has responded by offering a more expansive product offering and Best Buy with better service. Big Box stores will continue to be important to consumers if they can continue to offer services that online retail cannot. Sears and JCP failed to realize this and are struggling to adapt because of it. This is at the expense of the shareholders in which they were trying to appease 10 years ago.

]]>http://blog.vuru.co/share-buybacks-are-not-always-a-shareholders-best-friend/91625a94-a6b5-4bb7-9f22-fd37741b9812Tue, 28 Feb 2017 21:15:57 GMTSnapchat has been stealing the headlines so far with their plans to finally go public. The company is looking to raise upwards of $3B to fund, not only user growth, but their entrance into the wearable technology market.

In what is expected to be the biggest IPO so far this year, Snapchat (SNAP) is expected to go public in March. Details are yet to be finalized, but the company is expected to be listed on the New York Stock Exchange between $14 and $16 a share - for a total valuation ranging from $19.5B to $22.2B. SNAP would be the largest private tech company to go public in recent years and many professionals are wondering if this IPO will open the flood gates for other private companies (think UBER and Airbnb) to list publically as well.

But it’s important to take a step back - how does SNAP look as a company? How have previous tech company IPOs faired? The answers to these questions will be important for investors to consider when they consider the merits of adding SNAP to their own portfolio.

For the less technologically inclined, or those living under a rock, SNAP offers a mobile app that allows users to send self-destructing photos to one another. These photos can be uploaded to make a “story”, sent user to user, or posted in groups. The company makes money by selling ad space to corporations and placing these ads throughout the app. Also important to note is that SNAP is facing fierce competition from Instagram (owned by Facebook) and has had some of the features of their app blatantly copied.

Snapchat has yet to create any profits. In their last year, from audited statements filed, the company lost over $500 million. Their continued access to venture capital funding is what has kept the company running since it was founded. While these investors can tolerate a company losing money when the promise of selling the company later looms over their heads... stock market investors are often much less tolerant. Investors demand that the companies they own create profits to continue to grow and provide return - through capital gains or dividends.

Can Snapchat ever make money? Doesn’t seem likely currently.

The company is planning to use the cash they generate from the IPO to fund their entrance into the camera market - through their Spectacles. These sunglasses will be synced to their mobile app to allow users to take photos without ever taking their phones out. While this idea is promising, the company is still tied to their performance of their mobile app.

Recent IPOs of tech companies should serve as a basis for expectation for the SNAP IPO. Twitter, Fitbit, Facebook, and GoPro are all companies that offer a combination of tech products and mobile apps. These four companies can help put into context how SNAP's shares could perform after their initial offering. It is important to remember that Snapchat is still predominantly a social media company, but the money they are looking to raise is going to be used to launch a wearable technology product.

As you can see above, results have been mixed to say the least. Go Pro and Fitbit, who both sell singular focused tech products have seen their shares plunge in the market post-IPO. Neither company has been able to diversify their product line, increase sales or make more per sale to the extent that they’ve become profitable. Throw in the issues plaguing Twitter (which still has more users than Snapchat), and it is evident that recent IPOs have not performed well.

On the other hand, the rise of Facebook has been dramatic. The company has become engrained in the everyday lives of millions, if not a billion plus, users. FB has found ways to sell ads in every way, shape and form. Their platform is more of a way for users to manage their lives, keep in touch with friends and interact with their favourite brands. Companies are willing to pay for ads when they know that millions of users, from every demographic, will log on dozens of times. Most importantly - they’ve become profitable.

Does that sound like Snapchat? Not really. Snapchat is popular among millennials and younger generations as a way to keep social tabs on friends, send funny photos and pass the time. Facebook is still the first place many people will go to message their friends, look for contact information, and get their news.

Facebook captured the social media market early. They offered a full service platform that integrated every aspect of social interaction. Snapchat has yet to do this. What they provide is less developed, integrated and more gimmicky. They’ve now extended their focus to wearable technology - similar to GoPro and Fitbit. It’s quite obvious, as shown above, how things worked out for those companies.

Even more important, to thinking about the company, is that their core app is under siege from Instagram. According to TechCrunch, it only took 25 weeks for Instagram Stories to have more daily posts than Snapchat. Instagram has also added self-destructing photos and personal messaging. How long before users completely switch? With its core product under attack and management hoping to extend itself into a notoriously unprofitable market, SNAP is navigating into dangerous waters.

For investors - based on difficult dynamics in both the wearable technology and social media markets - it’s much more likely that Snapchat shares follow the trend of Twitter, Fitbit and GoPro then the trend of Facebook.

]]>http://blog.vuru.co/snapchat-ipo-facebook-or-fitbit/46e6c6bd-b3b3-49ca-b86c-7d69df534afdTue, 21 Feb 2017 16:23:23 GMT“We are introducing something this tax season that is totally new, and is in fact, a first in the tax preparation category.” Last week, Bill Cobb, the H&R Block’s President and CEO, was quoted as saying in reference to his company's recent annoucement.

Despite what you may be hoping for, Bill has not come up with a way to make taxes fun. Instead, H&R Block will be teaming up with IBM to make sure that each individual is likely to get the best possible tax return with the help of IBM’s artificial intelligence system - Watson.

“By combining the human expertise, knowledge, and judgment of our tax professionals with the cutting-edge cognitive computing power of Watson, we are creating a future where our clients will benefit from an enhanced experience and our tax pros will have the latest technology to help them ensure every deduction and credit is found.”

Clearly the CEO and other important company decision makers think that the computer processing power of Watson will help make their tax services the best for their clients.

For those still wondering what Watson is, the IBM website describes it as cognitive technology that can think like a human. In short, Watson is a supercomputer that is able to take in mass amounts of data, learn lessons, perform logical reasoning and interact with its users. Watson is even famous for his performance on Jeopardy - where he won his audition in 2011.

Why would this interest companies?

H&R Block’s tax professionals must understand the requirements of the US tax code that is close to 70,000 pages long - an impossible task for anyone. However Watson is able to digest the information contained in these page and ensure that H&R Block’s clients are receiving all the tax refunds they are owed. A win-win for the company and its customers.

Watson’s power extends well beyond tax filing. Imagine how effective Watson would be at creating a better grocery shopping experience by using WiFi, GPS and sensor data to determine how consumers shop the aisles? Or, how Watson would be able to analyze the customer services calls of a major telecom to help frustrated consumers and service agents get the right answers more efficiently. Big data can help with these problems - if it can be analyzed.

IBM is clearly ecstatic about the possibilities for the applications of Watson’s artificial intelligence capabilities. If and when partnerships, such as the one with H&R Block, create benefits for Watson’s users - companies will be lining up to get their hands on the power of IBM’s new product.

This is great news for IBM investors. IBM has a storied history of being a leader in the computer, IT and consulting industries. The company has managed to reinvent itself numerous times - pivoting from hardware to software and now to artificial intelligence. In recent years the company has struggled to increase its operating income. Struggles in other segments, from hardware to software, have hampered on the company’s performance.

Watson represents another transition from IBM, and one investors should pay close attention to. Companies are always looking for a competitive edge and will be willing to pay for tools, like Watson, to help them find these advantages.

]]>http://blog.vuru.co/watson-should-be-on-every-companys-radar/72aceafa-62a8-4916-8d42-63bec0404954Thu, 09 Feb 2017 21:32:51 GMTWhen John Deere comes to mind it’s hard not to imagine the iconic green and yellow tractors hard at work in the fields. Power, agility, looks … it’s everything a farmer needs and wants. From tractors, harvesters, combines and the countless kinds of farm implements that they tow and operate, to lawn and construction equipment, Deere and Co. has a wide and diverse variety of products that have a reputation of getting almost any job done.

Although green and yellow might be its colors, Deere and Co. is truly red, white and blue. Based in the American heartland state of Illinois, Deere and Co. is the largest agriculture machinery company in the world.

Deere and Co. ranks 97th on the Fortune 500, and 46th on the worlds most admired companies. It has operations in over 52 countries and employs over 67,000 workers.

Why John Deere is Well Positioned

The long-term demand for key food inputs, such as wheat, corn and oil seeds is only going to grow as the world continues to grow. John Deere is poised to capture this growth and supply farmers with the new equipment they need to manage their costs.

By 2050 the world population is projected to reach 9.7 billion people and the world’s agriculture industry must feed an ever-increasing number of people every day. Since 1960, global consumption of grain and oilseeds has more than tripled and over the last 40 years has doubled. Experts say agricultural production may need to nearly double over the first half of this century to keep pace with demand. Clearly, it's something that will require an increased reliance on mechanization and productive equipment from industry leaders like John Deere.

The farming industry looks to John Deere for their effective high quality products that come with a variety of additional services, supports and solutions. One key solution that John Deere is taking advantage of to boost sales is precision agriculture technology.

Precision Agriculture: The Solution to Increase Land Yields

Precision agriculture is the future. It is a field that includes auto tracking, yield monitors, remote equipment monitoring, and data management. Essentially, advanced tools that make agriculture machinery more productive and farmers more profitable. In the not-too-distant future, precision agriculture may evolve to a point that farmers will be able to monitor, manage and measure the status of virtually every plant in the field.

Globally, Goldman Sachs estimates that advances in precision agriculture technology such autonomous farm vehicles that perform precision planting, fertilizing and irrigation could increase farm yields by 70 % by the year 2050.

By taking a page from Silicon Valley, Deere and Co. is making a major push to become the undisputed global leader in precision agriculture. John Deere is, investing in mobile apps that let farmers monitor the spacing between seeds and is connecting its machines with sensors that detect when they need to be repaired. Deere has acquired several agriculture tech start-ups over the last few years and has become a large tech incubator. The John Deere Technology Innovation Centre provides management training and resources to entrepreneurs that have new ideas for the field of precision agriculture and is currently experimenting with ideas like electric tractors and soil moisture trackers.

According to Samuel R Allen, chairman and CEO of John Deere:

“Precision farming is a big deal. It is an area almost certain to shape, if not define, the future of our industry. And it is an area in which John Deere fully intends to assert a leadership position.”

Operations

Deere’s net income of $1.5 billion in 2016 was a 5.72% net profit margin. The rest of the industry had a much lower net profit margin of 1.83%. The company achieved this by significantly reducing administrative expenses, including travel, advertising and indirect materials, by over 10 percent in the last year alone.

Despite slumped revenue and a weak global agricultural sector that will continue throughout much of 2017, John Deere has exceptional operating performance. From 2012 to 2016, total revenue dropped by 9,513 million dollars but net income only decreased by 1,540 million dollars. Operations are as efficient as ever and with a bright outlook on future sales, John Deere is positioned to perform very well in the long term.

It’s no accident that John Deere has grown into one of the world most admired businesses. The numbers may not look the best on paper but there is a very promising future for the company. With its feet on the ground and its eyes on the horizon, John Deere is ready to take on the challenges of feeding the world.

]]>http://blog.vuru.co/john-deere-cultivating-success/5af5d5b0-56a9-42ff-9826-50493856f2acFri, 03 Feb 2017 18:58:14 GMTNetflix announced their fourth quarter results earlier this month, and continued to surprise the market with user growth above expectations. During the fourth quarter of 2016, the company added 7.05 million users, which was twice the amount of users they added in the in the third quarter. Of these new users, 73% came from international markets - the focus of the company’s user growth strategy.

Shown below is the company’s revenue growth as an illustration of their ability to add users. Revenue has doubled since 2011. This is thanks to expansion into new countries and further penetration in the countries they already offered their streaming service in.

Netflix has always prioritized user growth and this has been the basis of what the company’s stock has been trading on for many years. The management of the company has realized this and has always had a focus on generating user growth. However, in the past, they have tried to recreate their successful US model for streaming in other countries. This has lead to various levels of success.

Netflix’s entrance into the UK was much easier than its entrance into some Latin American countries - Brazil in particular. What the company failed to realize was that the more a country differs from the US, the less they would be willing to consume American style television and movies. Consumers in the UK already watch many American television programs and were much more willing to become Netflix users. In countries like Brazil, many users don’t watch American television, and many more don’t even speak English.

Despite these failures, users continued to grow. But to take the company to new heights and dominate the streaming market around the world, they needed a new strategy. Shown below, in a graphic from the Wall Street Journal, is the leap in international expansion the company has taken in 2016.

Netflix took the lessons they learned and focused on creating original tailored content for each of the market’s they were planning on entering and in which they already operated. The company is planning on launching 1000 hours of original streaming content in 2017. Each market in which they operate, Canada to Vietnam, will offer content developed with these markets in mind, with hopes of continuing to generate user growth. Only 93 million people worldwide have an account - meaning there is still plenty of room to grow.

The growth has not been cheap - in 2016 the company burned through almost $840 million in cash to fund their original content and market launches. But when your stock trades on earnings growth, this is what it takes to generate returns for your shareholders. Investors seem clearly willing to continue to fund the company if the user base continues to grow.

Netflix took the lessons it learned in its early expansion into new markets and transformed its international expansion strategy to take into account the preferences of users in each market it entered. While this strategy has significantly increased costs, it has translated into user growth.

The company trades at 334x its earnings per share, and is the best performing stock on the NASDAQ since 2010. The market clearly cares more about user growth than profits. Expect user growth to continue given the company’s significant investment in original content.

]]>http://blog.vuru.co/netflix-a-lesson-in-strategy/ab060444-82c7-4d53-ba52-e3aefbfb2843Tue, 31 Jan 2017 20:32:47 GMTHow many times have you gone to the grocery store and forgotten what to buy? Frustrating, isn’t it? Happy to have you know that there are smart fridges out there that send personalized shopping lists, images of what is inside your fridge and check spoilage of food all from your mobile phone through the internet. This is known as the Internet of things.

The internet of things is the future and it is much bigger than you may think. Smart devices and appliances are all around us, embedded with electronics, software, sensors, network connectivity and the ability to collect and exchange data. The integration of the physical world into computer based systems is allowing technology to reach new frontiers.

It is easy to give credit to companies like Samsung and Google who are producing smart products for the public market, however the company that truly holds the keys to the future is Intel.

Why Intel

As we head into the mass data age, the advancement of the computer processor is inevitable. Intel, with its market share of 87.7 percent of the processing industry is positioned to influence the technology of the future like no other company. After all, devices are only as good as their processors.

Today, smart grids, smart homes, intelligent transportation, and smart cities are all being powered by intel processors and by the looks of it, things aren’t slowing down anytime soon.

Intel’s New Project

Intel CEO, Brian Krzanich, spoke at the National Retail Federation's Big Show conference last Monday and announced the chipmaker's latest innovation for the retail sector.

It is called the Responsive Retail Platform (RRP), and according to Intel, it connects different types of in-store technology and makes it easier to develop and use ‘Internet of Things’ software. Simply put, Intel is bringing together hardware and software in a standardized way so retailers can capitalize on internet of things technology. Now small business will have access to data at the same processing speed and power as multinational corporations.

To put this into perspective, Intel will allow retailers to see what items are not in their correct location and up-to minute store inventory, including what is in storage. They can even tell what items go in to changing rooms, but never make it to the cash register, essentially giving physical retail the same capabilities and analytics of online retail. All this information is necessary to help serve customers better and make better business decisions.

With technology like robots and artificial intelligence to free up employees, every aspect of the store and supply chain will allow retail employees to better focus on the customer and improve the store’s performance.

Along with their big reveal on Monday, Intel also plans for a 100-million-dollar investment in retail processing technology ranging from inventory management all the way to checkout technology.

Competitive Advantage

Intel is the king of the processing industry. Its large market share and a net profit margin of 21% over the last 5 years has earned it an economic moat score of 10. Intel’s largest competitor Advanced Micro Devices Inc. (AMD) had a net profit margin of -8% over the last 5 years. Intel is running its competitors into the ground with its superior processor performance and application into smart devices.

The Future

Ask yourself, what will we see 10 or 20 years from now? Flying cars? Personal jetpacks? Probably not. More likely we’ll see tiny computers infused into almost every object in our world, wirelessly sending and receiving information to make our lives better. The internet of things will soon become a household phrase and Intel has solidified itself at the heart of this exciting age of technology.

]]>http://blog.vuru.co/the-surprise-winner-of-iot/81ea29d5-7655-4bc6-a93d-4893f7a167f1Tue, 24 Jan 2017 00:03:27 GMTFour times a year investors seems to have a habit of losing their minds.

When the companies in their portfolio report their quarterly earnings, the market often reacts with large swings up or down. This can lead to poor decision making on the part of investors who may react impulsively to an earnings announcement that really does not affect the big picture.

To help guide you through the upcoming earnings season, Vuru has some tips on what to think about when the companies in your portfolio announce their results. Investors should remember that earnings season may not be an adequate representation of a company's value, drastic changes in stock prices tend to not represent the underlying value of a company.

Its Never as Good or as Bad as it Seems

Whether your company missed, met or exceeded the expectations of the analysts that cover the company, markets tend to go crazy over the announcement. Often stock prices will drastically spike or drop minutes after the announcement as investors and speculators think about how the company is changing.

However it is important to realize that often these gains or losses are only temporarily. Investors realize that beating earnings by 5% more than expected shouldn’t cause the company’s shares to rise more than 5%. Most of the stock price increases related to beating earnings are lost in the coming days as speculators move in and out of the stock. The same also holds true for companies who miss earnings. They tend to gain back some of the losses in the coming days.

As well, around earnings seasons day traders, hedge funds and other speculators will take positions in companies that they think will release earnings different from analyst’s expectations. These groups will cause dramatic stock price swings that could take some time to get back to normal. Waiting through this time frame is likely the best idea.

What's the Big Picture?

Value investors realize that one earnings announcement isn’t the make or break for a company. With a long-term horizon and a focus on finding companies that are undervalued, value investors really need to look at the big picture, especially around earnings season.

How does the company announcement change the big picture? A poor result does not necessarily affect the potential for a company moving forward. Investors should think of these annoucements as data points. Each annoucement adds another data point to the information the investor has on whether or not the company is worthy of investment. A really bad winter may have lead to a poor earnings result, but that does not mean that the company is set up poorly for the future.

How does this fit in the larger trend? This data point, along with the past announcements sets the picture that investors should look at when considering companies they own and companies they would like to purchase.

Companies Manage Earnings

Company Chief Executive Officer’s understand that the earnings of the company, in relation to what analysts expect, can lead to large changes in the price of a company’s stock. CEO’s also get large percentages of their compensation in the form of stock and stock options. They have the incentive to ensure that the company’s earnings are “managed” to make sure that investors are not taken off guard and the stock price does not drop more than necessary.

This bias can lead to some less than ethical accounting practices and to CEO’s using their statements to guide the expectations of investors and analysts. Understanding these facts can help investors from making poor decisions during earnings season.

Key Takeaway

Investors should always take a stepback during earnings season and consider why they invested in the companies they own in the first place. How does the recent annoucement affect their original investment criteria? If the answer is not at all, investors should not worry about short-term changes in the stocks of companies that they own.

]]>http://blog.vuru.co/what-to-remember-this-earnings-season/edbb4864-3fac-47f4-be12-e5c492402800Mon, 16 Jan 2017 22:52:33 GMTDonald Trump is set to be sworn in as the next President of the United States on January 20th. He campaigned on a promise to keep jobs in America and bring home the ones that left in recent years. Trump promised to take a tough stance with companies looking to other markets to create their products - namely Mexico and China. Despite holding no formal power as of yet, the President-Elect has been involved in several companies announcing their plan to keep jobs in American.

The Trump administration offered $7 million in tax credits over 10 years to a subsidiary of United Technologies (UTX) earlier in December in order for them to keep ⅓ of the jobs that they were planning on moving to Mexico.

Sprint confirmed almost a week ago, via a public statement, that they are planning to create 5,000 jobs in customer care and sales that were not previously guaranteed to happen in the United States

Ford Motor Company has canceled their $1.6 billion investment in Mexico and instead plan to invest $700 million in Michigan and create 700 new jobs.

These announcements have gone a long way to help increase the credibility of the incoming President and have excited his supporters about what is yet to come. These investments are likely to follow through and help create jobs in the US - helping the US economy. However there is more to think about than just job creation when you are thinking from the point of view of an investor.

As an investor there are two things that should worry you if your company has decided to pursue American investment over developing market investment: (1) will this increase the cost production? (2) does this decrease the return on investment?

American companies have been moving their production to other countries because these countries have a comparative advantage in production. This could be cheaper labour, better technology, or fewer other opportunities. Traditionally American companies have been moving production from the country to take advantage of cheaper labour. By keeping these jobs in America: Ford pays higher wages to workers -> cost of production increases -> prices increase to offset cost increase -> consumers respond by buying less -> company profits decline if sales drop enough.

Not what investors wants to hear.

Ford initially committed $1.6 billion to investments in Mexico, but since changing their plans to invest in Michigan, has dropped this number to $700 million. Why the change? The answer is likely that they couldn’t find good use for the extra $900 million in Michigan and that money would have gone to waste. Thus, Ford’s planned investment decreased. Because Ford is investing less, they are likely to make less return on their investment. The $900 million is going to sit in cash on the balance sheet. Cash in the bank account earns minimal interest, but cash used to build cars does far better.

Again, not what investors want to hear.

Investors should be concerned if either of these questions are answered with yes. Higher production costs leads to less profits leftover for shareholders and decreased investment means that more cash is being left unused. Creating jobs in America is important, but only if it makes sense in the context of shareholder wealth.

]]>http://blog.vuru.co/trumps-made-in-america-could-hurt-investors/f5bcd6c0-2956-4354-a511-bd197d676247Mon, 09 Jan 2017 19:29:38 GMTAs we mentioned in our newsletter last week, Starbucks announced that long time CEO Howard Schultz would be retiring and handing over the leadership position of the company to current COO Kevin Johnson. Investors were clearly taken off guard and the stock dropped as much as 10% after the announcement.

This got us thinking about why investors reacted this way. Surely the company isn’t 10% less valuable because one employee in 191,000 decided to leave the company?

It is clear that Howard has done a remarkable job as the CEO of the company. He has taken the company from a small US chain, to an international coffee icon and arguably one of the most recognizable brands in the world. Starbucks now has operations in Brazil, Indonesia and the UAE. This international vision was developed by Mr. Schultz.

Mr. Schultz’s role in the company should not be understated, but the man appointed to take over his role is clearly up for the task of maintaining the company’s plans for the future.

Kevin Johnson currently serves as the COO and, as stated in the Wall St. Journal, has been responsible for the operations of the company for the past couple of months. He has worked hand in hand with Mr. Schultz in developing the company’s international strategy to continue to grow in foreign countries and maintain the company’s premium coffee experience.

Part of the worry for investors is that the new CEO of the company does not have the same decision making ability as the previous CEO. It is ultimately the job of the CEO to make final calls on strategy and make tough decisions that could affect the company going forward.

However investors should not be worried about the ability of Mr. Johnson to make decisions at the steering wheel of the company. Before spending seven years as COO, Mr. Johnson served on the board of directors. Needless to say he has the experience and skill to make the right call after being responsible for the day to day operations of the thousands of stores that Starbucks operates around the world. He knows the business in and out, and knows what the company needs to continue to do right to make the brand grow.

This brings us to the importance of transition plans. As Mr. Schultz has gotten older (he’s currently 63), the company has been aware of the need to find a suitable replacement who can do as good of a job, if not better, when Mr. Schultz decided to retire. They’ve given candidates, such as Mr. Johnson, plenty of hands on experience to give them the tools for the job they are about to inherit. A coffee chain is all about customer experience, and no one should know that better than the chief operating officer.

When picking a new CEO, the company wants to make sure that they have someone with the right skills and experiences to make the right calls. Investors need to remember that companies always have this in mind. Before Howard Schultz announced his retirement, Starbucks already knew that Kevin Johnson would be the right man for the job.

Investors has since realized this as well and the Starbucks stock has already regained all of the losses since the announcement. Nothing has changed fundamentally about the company and long-term prospects for the stock remain as strong as ever. The next time a major company announces a change in CEO, investors should remember that most of the time, nothing is fundamentally changing about the company.